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The College Graduate's Guide To Managing Money And Debt

If all of your loans are with the same lender, most lenders will offer unified billing, where you will get one bill listing all of your loans. Otherwise, you may wish to consolidate your loans, which replaces all of your loans with a single loan. This will streamline and simplify repayment of your student loans. (You cannot, however, consolidate federal and private loans together. Federal loans can be consolidated at loanconsolidation.ed.gov, even if the federal loans are held by a bank or other financial institution. Consolidation loans for private or alternative student loans are offered by a variety of lenders. A list is available at www.finaid.org/privateconsolidation.)

Consider consolidation carefully. There are some reasons why you might not want to consolidate your loans. Consolidating federal loans does not save you money. The interest rate on a federal consolidation loan is based on the weighted average of the interest rates on the loans, rounded up to the nearest 1/8th of a percent and capped at 8.25%. This preserves the cost of the loans. Consolidation may provide access to alternate repayment plans that can reduce the monthly loan payment, but this will ultimately cost you more money by stretching out the term of the loan.

Private consolidation loans, on the other hand, are similar to a more traditional refinance. They are new loans with a new interest rate based on the current credit score of the borrower and cosigner, if any. Credit scores tend to decrease with each year in school, due to the increasing loan balance. It takes several years of paying every debt on time as per the agreement to build a better credit score. Until then, a private consolidation loan will have a higher interest rate. Note that you must repay all your debts responsibly, not just the student loans. There is also no tolerance for bad behavior, as even a single late payment can ruin an otherwise good credit history.

But in both cases there are drawbacks to consolidation. If your loans have significantly different interest rates, you may be able to save money by accelerating repayment of the highest interest rate loan first. There are no prepayment penalties on student loans, so you can make extra payments on the most expensive loan after making the required payments on all your loans. Making extra payments on the loan with the highest interest rate will reduce the average interest rate on your loans. But if you consolidate your loans, you will replace them with a single loan with a single interest rate, preventing you from targeting the highest rate loan for earlier repayment.

Don’t miss the tax break. When you file your federal income tax returns, be sure to claim the student loan interest deduction every year. You can deduct up to $2,500 per year in interest paid on federal and private student loans on your federal income tax returns. This deduction is taken as an above-the-line exclusion from income, meaning that you can take it even if you don’t itemize.

Options if you can’t pay. If you encounter financial difficulty, call your lender to explore options for financial relief. There are options that provide short-term and long-term relief.

Federal student loans offer temporary suspensions of the obligation to repay the debt, such as deferments and forbearances. These are best for short-term financial difficulty, such as medical or maternity leave or job loss. But since interest continues to accrue, digging you into a deeper hole, it may be better to continue making some payments on your loans, albeit at a reduced payment amount.

Alternate repayment plans, such as extended repayment and income-based repayment, provide a lower monthly payment. These are best for long-term financial difficulty, such as income insufficient to repay the debt. Extended repayment reduces the monthly payment by stretching out the term of the loan. Income-based repayment bases the monthly payment on a percentage of the borrower’s discretionary income, as opposed to the amount of debt. Borrowers whose total federal student loan debt at graduation exceeds their annual income will benefit from income-based repayment.

But increasing the term of the loan will increase the borrower’s costs by charging interest for a longer period of time. For example, increasing the term of an unsubsidized Stafford loan from 10 years to 20 years will reduce the monthly loan payment by about a third, but it will more than double the total interest paid over the life of the loan. If you can afford it, you should stick with the shortest repayment term you can afford, such as the standard 10-year repayment plan.

Don’t ignore your loans. If you ignore your debt, you will only make a bad situation worse. Borrowers who default lose options, such as access to deferments and forbearances. Default increases the cost of the loans, since up to 25% of every payment will be deducted for collection charges before the rest is applied to the interest and principal balance of the loan. The collection charges slow the repayment trajectory, so a loan that would normally take 10 years to repay before default ends up taking 19 years.

There’s also no getting away from student loans, since federal and private student loans are almost impossible to discharge in bankruptcy. The federal government has very strong powers to force repayment of defaulted loans, such as garnishment of up to 15% of disposable pay and Social Security disability and retirement benefits. The federal government can also offset federal and state income tax refunds and lottery winnings, and block the renewal of professional licenses, all without a court order.

Become financially literate. This means learning about how to manage your money, not just repaying student loans. There are two good introductions for people who are just starting out: Beth Kobliner’s Get a Financial Life: Personal Finance in Your Twenties and Thirties and Suze Orman‘s The Money Book for the Young, Fabulous & Broke. These books will teach you how to set and meet your financial goals. You should also subscribe to Consumer Reports. Other book recommendations can be found in Fastweb’s list of the best money books for new college graduates.

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Excellent article on financial management for recent college grads! One the best things a recent college grad can do is to continue living a frugal lifestyle as if they were still in college. Keep your old car, live with a roommate, eat Ramen, etc. If you can keep your expenses extremely low, you have cash to make extra principal payments on your student loans.

This is good advice, but it would be far more helpful to help students avoid onerous debt burdens to begin with by properly informing them on what majors will best help them get a job. The book “Worthless” is the best on this subject: I wrote a review of it here.

An excellent article. The college grad must get a handle on all aspects of financial management, financial planning, bank accounts, consumer credit, home ownership, investments and investing etc. I found a great resource for this to be the book “Retire Independently, Retire Without Social Security”. It covers all the basics needed for becoming independent and achieving financial solvency.

Check out Coin. It is the funniest thing I’ve ever seen that explains pretty much everything I needed to know about getting started with my money. The book is $20 and I learned more in an hour and a half of reading it than I did in some of my semester-long courses. Definitely worth it! www.coininthebank.com is the website.